Into the interest rate maze

Financial literacy is not great in Australia. Worryingly, the latest research by the Australian Securities and Investments Commission shows that there are also many obstacles that make it even harder for people to make good financial decisions. However this may all be about to change thanks largely to the work of the Australian Bankers Association (ABA) and the ANZ bank. An unexpected outcome of ANZ’s decision late last year to formally ‘de-couple’ its interest rate movements from the Reserve Bank (RBA) has been that consumers are now far more knowledgeable about wholesale funding, international market turbulence and fierce competition for deposits. Each time one of the ABA’s or the ANZ’s explanations for why they need to jack rates up even higher is revealed as inaccurate, they retreat into an ever more technical space, further into the interest rate maze, if you like. This time, we are following them into that maze.

First we were told that higher interest rates were due to higher funding costs. Banks asserted that this was a serious concern for us all and that we needed to ensure that banks remained viable, as Australians would need to maintain a stable banking system to avoid the calamity the rest of the world had seen. But then the RBA started to say that funding costs were showing signs of decline. Surely rate cuts should follow? But no, banks now explained that they were less reliant on wholesale funding, and consumer deposits were becoming more important and so expensive that they could not possibly reduce lending rates.

Never mind the inconvenient fact that the increases in lending rates have not been passed through to savers. Instead, the banks engaged in a divide-and-conquer strategy, pitting consumers against each other. This provided an important distraction until the RBA noted that the increases in lending rates had been about maintaining profits - not deposit rates. And last month the ANZ descended further into the maze by saying that it needed to increase lending rates because it had replaced cheaper long-term debt with more expensive long-term debt.

This brings us to the RBA’s May 0.50% interest rate cut. Last week the ANZ reduced its interest rates by 0.37%. The reason they were now able to reduce rates? According to their statement, ANZ “noted that the RBA’s recent decision to reduce the cash rate has impacted domestic funding sources, giving us scope to reduce lending rates by 0.37%pa.” So it seems that ANZ’s interest rates are set by the RBA after all.

While the ANZ has released an unprecedented amount of data on its funding costs, the message seems to always be the same – trust us, accept that we are changing rates and stop questioning us about it. The result however seems to be that Australians are questioning more and realising that they have other options. So much so that finance comparison website Mozo recently reported that consumers are increasingly dissatisfied with the big four and that many are now looking to switch providers.

Australian consumers are being expected to make ever more complex financial decisions, however this is certain: consumers now understand that by exercising their power to move their money for a better deal, they are also getting a more competitive banking system.